James River (US:JRVR)2023-11-14 21:28PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents James River Group Holdings, Ltd.'s unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2023, detailing financial position, performance, and cash flows Condensed Consolidated Balance Sheets Total assets increased to $5.19 billion, driven by cash and reinsurance recoverables, while liabilities rose to $4.49 billion, primarily due to higher loss reserves Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Invested Assets | $2,189,522 | $2,192,294 | | Cash and cash equivalents | $232,923 | $173,164 | | Total Assets | $5,193,487 | $5,137,075 | | Reserve for losses and loss adjustment expenses | $2,887,352 | $2,768,995 | | Total Liabilities | $4,486,045 | $4,438,411 | | Total Shareholders' Equity | $562,544 | $553,766 | Condensed Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income Net income available to common shareholders significantly improved to $16.9 million in Q3 2023 and $34.6 million for the nine months, driven by higher investment income Q3 2023 vs Q3 2022 Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net Earned Premiums | $202,625 | $190,189 | | Total Revenues | $233,427 | $201,229 | | Losses and loss adjustment expenses | $139,171 | $153,008 | | Net Income (Loss) | $19,551 | $(4,621) | | Net Income (Loss) available to common shareholders | $16,926 | $(7,246) | | Diluted EPS | $0.45 | $(0.19) | Nine Months 2023 vs 2022 Performance (in thousands, except per share data) | Metric | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | | Net Earned Premiums | $608,075 | $566,275 | | Total Revenues | $695,149 | $587,983 | | Losses and loss adjustment expenses | $435,767 | $409,985 | | Net Income (Loss) | $42,471 | $13,248 | | Net Income (Loss) available to common shareholders | $34,596 | $7,123 | | Diluted EPS | $0.91 | $0.19 | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $562.5 million, primarily due to net income, partially offset by comprehensive loss and dividends paid - For the nine months ended September 30, 2023, total shareholders' equity increased by $8.7 million. Key changes include a $42.5 million net income contribution, offset by a $25.8 million other comprehensive loss and $13.6 million in total dividends paid22 Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $97.8 million, while cash used in investing activities significantly reduced, and financing activities shifted to a net cash outflow Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $97,751 | $168,129 | | Net cash used in investing activities | $(18,016) | $(262,181) | | Net cash (used in) provided by financing activities | $(16,333) | $91,953 | | Change in cash, cash equivalents, and restricted cash | $63,402 | $(2,099) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, investment portfolio, loss reserves, and segment information, highlighting the sale of IRWC renewal rights, adverse reserve development, and the announced sale of JRG Re - On September 29, 2023, the company sold the renewal rights to its Individual Risk Workers’ Compensation (IRWC) business, recognizing a $2.2 million gain on sale and a $2.5 million impairment charge on the associated trademark6197 - For Q3 2023, the company experienced $12.5 million of net adverse reserve development, primarily from the Excess and Surplus Lines ($7.8 million) and Casualty Reinsurance ($4.7 million) segments68 - Subsequent to the quarter end, on November 8, 2023, the company agreed to sell its JRG Reinsurance Company Ltd. subsidiary to Fleming Intermediate Holdings LLC for total consideration of approximately $277 million151152 - On November 10, 2023, the Board of Directors initiated an exploration of strategic alternatives, which could include a sale, merger, or other strategic transaction154 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, strategic actions including the JRG Re sale, and operational results, highlighting adjusted net operating income, segment performance, and liquidity - The company has undertaken significant strategic actions, including suspending new business in the Casualty Reinsurance segment, non-renewing a large California workers' compensation program, and selling the renewal rights to its Individual Risk Workers' Compensation (IRWC) business177179180 - On November 8, 2023, the company entered into a definitive agreement to sell its Casualty Reinsurance subsidiary, JRG Re178 - On November 10, 2023, the company announced its board has initiated an exploration of strategic alternatives, including a potential sale or merger176 Key Performance Metrics (Three Months Ended Sep 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Gross Written Premiums | $342.5M | $358.5M | | Net Earned Premiums | $202.6M | $190.2M | | Underwriting Profit (Non-GAAP) | $7.6M | $11.3M | | Adjusted Net Operating Income (Non-GAAP) | $18.3M | $15.5M | | Combined Ratio | 96.2% | 94.1% | Results of Operations Adjusted net operating income increased to $18.3 million in Q3 2023, driven by higher net investment income despite a higher combined ratio of 96.2% - Q3 2023 underwriting profit was $7.6 million (96.2% combined ratio) compared to $11.3 million (94.1% combined ratio) in Q3 2022185 - The Q3 2023 loss ratio decreased to 68.6% from 69.5%, but this was offset by an increased expense ratio of 27.6% (up from 24.6%). The quarter included $12.5 million (6.2 points) of adverse prior-year reserve development186 - Net investment income for Q3 2023 grew 52.0% to $26.3 million, driven by higher yields on fixed maturities, bank loans, and cash equivalents due to rising interest rates182187 Premiums Gross written premiums decreased 4.5% to $342.5 million in Q3 2023, with E&S segment growth offset by declines in Casualty Reinsurance and strategic exits Gross Written Premiums by Segment (Q3 2023 vs Q3 2022, in thousands) | Segment | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Excess and Surplus Lines | $217,151 | $204,785 | 6.0% | | Specialty Admitted Insurance | $125,700 | $123,389 | 1.9% | | Casualty Reinsurance | $(348) | $30,331 | N/A | | Total | $342,503 | $358,505 | (4.5)% | - E&S segment growth was driven by a 10.3% increase in Core E&S divisions, particularly General Casualty (+42.1%) and Manufacturers & Contractors (+8.8%), while Commercial Auto declined 43.7%204 - The company is strategically exiting certain workers' compensation lines, having non-renewed its large California program and sold the renewal rights to its Individual Risk Workers' Compensation (IRWC) business. These lines represented 10.1% of consolidated GWP for the first nine months of 2023206 Segment Results E&S segment maintained an 88.4% combined ratio, Specialty Admitted improved to 92.5%, while Casualty Reinsurance reported a 122.2% combined ratio due to adverse development Combined Ratio by Segment (Q3 2023 vs Q3 2022) | Segment | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Excess and Surplus Lines | 88.4% | 88.2% | | Specialty Admitted Insurance | 92.5% | 98.4% | | Casualty Reinsurance | 122.2% | 90.9% | | Total | 96.2% | 94.1% | - The E&S segment's Q3 results included $7.8 million (5.0 points) of adverse prior-year reserve development in its General Casualty line214 - The Specialty Admitted segment's improved profitability was due to a lower accident year loss ratio (77.8% vs 93.4%) from a better business mix and improved loss trends218219 Investing Results Net investment income increased 52% to $26.3 million, driven by higher yields in a rising interest rate environment, with the portfolio maintaining high quality Net Investment Income by Source (Q3 2023 vs Q3 2022, in thousands) | Source | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Fixed maturity securities | $17,166 | $12,267 | | Bank loan participations | $4,276 | $3,370 | | Cash, equivalents & short-term | $4,085 | $1,687 | | Other | $1,808 | $966 | | Gross Investment Income | $27,335 | $18,290 | - The fixed maturity portfolio, valued at $1.84 billion, is primarily composed of State/Municipal (17.6%), Residential mortgage-backed (22.7%), and Corporate (39.2%) securities231 - 91.1% of the fixed maturity portfolio is rated 'A' or better by S&P or an equivalent agency231 Liquidity and Capital Resources The company maintains adequate liquidity with $94.1 million cash from operations, a $315.0 million credit facility, and a leverage ratio of 22.1% - Cash provided by operating activities was $94.1 million for the nine months ended Sep 30, 2023, down from $167.6 million in the prior year, mainly due to the suspension of underwriting in the Casualty Reinsurance segment242 - The company's leverage ratio was 22.1% as of September 30, 2023, comfortably below the 35.0% limit required by its senior credit agreements260 - The company maintains significant reinsurance protection, including a property catastrophe treaty providing $20.0 million of coverage, which would require an event greater than a 1-in-1,000 year PML to exhaust263267 Reconciliation of Non-GAAP Measures This section reconciles non-GAAP measures such as Underwriting Profit, Adjusted Net Operating Income, and Tangible Equity to their most comparable GAAP measures Reconciliation of Net Income to Adjusted Net Operating Income (Q3 2023, in thousands) | Description | Amount | | :--- | :--- | | Income available to common shareholders | $16,926 | | Losses and loss adjustment expenses - retroactive reinsurance | $750 | | Net realized and unrealized investment (gains) losses | $(212) | | Other (income) expenses | $(1,133) | | Impairment of intangible assets | $1,975 | | Adjusted net operating income | $18,306 | Reconciliation of Shareholders' Equity to Tangible Equity (as of Sep 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Shareholders' equity | $562,544 | | Add: Series A redeemable preferred shares | $144,898 | | Add: Deferred reinsurance gain | $37,653 | | Less: Goodwill | $(181,831) | | Less: Intangible assets, net | $(32,904) | | Tangible equity | $530,360 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and equity price risks, with no material changes reported since the 2022 Annual Report - The company's main market risks are interest rate risk from fixed maturity investments and equity price risk. There have been no material changes in these risks since the year-end 2022 report300301 Item 4. Controls and Procedures Disclosure controls and procedures were deemed ineffective due to an unremediated material weakness in internal control over financial reporting, leading to a Q2 2023 restatement - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023303 - A material weakness was identified in internal control over financial reporting because controls failed to detect a material misstatement related to unrecorded reinstatement premium in the Q2 2023 financials304306 - A remediation plan has been initiated, which includes implementing additional review procedures, training accounting personnel, and enhancing process documentation307 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces two purported class action lawsuits concerning alleged inadequate reserve disclosures for Rasier LLC and ineffective internal controls over reinsurance premiums - A purported class action lawsuit filed in July 2021 alleges inadequate disclosures regarding reserves for policies covering Rasier LLC (an Uber subsidiary). The company's motion to dismiss was denied, and discovery is underway312 - A new purported class action lawsuit was filed on November 13, 2023, alleging failure to disclose ineffective internal controls related to the recognition of reinstatement premiums for reinsurance313 Item 1A. Risk Factors New risk factors include a material weakness in internal controls, risks associated with the pending JRG Re sale, and uncertainties from the exploration of strategic alternatives - A new risk factor is the identified material weakness in internal controls, which could adversely affect the ability to accurately report financial results314 - The pending sale of JRG Re is subject to risks, including failure to meet closing conditions (like regulatory approval) and the fact that a portion of the consideration ($139 million) is a pre-closing dividend subject to asset availability315316 - The exploration of strategic alternatives creates uncertainty that could adversely affect the business, including employee and customer retention318 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable Item 5. Other Information The company reported no other information required to be disclosed under this item - None Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the Stock Purchase Agreement for JRG Re sale and the Third Amended and Restated Credit Agreement - Key exhibits include the Stock Purchase Agreement for the sale of JRG Re and the Third Amended and Restated Credit Agreement from July 2023322